Revisiting Wage, Earnings, and Hours Profiles

This paper consists of two parts. In the first part we use the PSID (which is now long enough to allow the observation of the entire working life) to document empirical life cycle profiles (wage, earnings, hours) of a cohort of workers followed from when they enter the labor market in 1967 to when they retire in 2006. We find an empirical pattern that is inconsistent with the human capital model, where the three profiles are hump-shaped. In particular, in this model the wage and hours profiles necessarily have the same shape if human capital depreciates and the real interest rate is not too high relative to the subjective discount rate. We find instead that in our data the wage profile does not decline while hours per worker drop sharply beginning at age 50, when many workers seem to start a smooth transition into retirement by working progressively fewer hours. The decline in earnings is therefore driven by labor supply. This pattern is confirmed by the CPS. We show that a model in which the value of leisure/disutility of work starts growing after age 50 reconciles theory and data. In the second part we study an OLG model that incorporates two main forces that may be driving such shift in preferences: health deterioration and appearance of grandchildren. The model produces conditions under which unhealthy workers and grandparents reduce labor supply. Under certain conditions the average effects of such shocks can be estimated in a straightforward way without having to resort to full structural estimation. We illustrate such identification conditions and show that while the health channel has an insignificant effect, intergenerational transfers of time (grandparenting) play a major role in reducing labor supply along the intensive margin towards the end of the working life.